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Unconventional Financial Stock Should Deliver Profits Through the Holidays

When you think of financial stocks, you usually don't think about reloadable, prepaid debit cards. But that's the business that Green Dot (NYSE: GDOT) is in, and business is very, very good.

Last month, the company reported strong Q3 earnings that easily beat Wall Street expectations. It said it saw a profit of $0.24 per share, well above the consensus estimate for EPS of $0.18. On the top line, the company said revenue rose to $136.5 million from $132.8 million in the same quarter a year ago.

Management also raised its forecast for full-year adjusted earnings to $1.10 to $1.20 per share from $1.05 to $1.20 per share previously. And its top-line estimate for the full year was increased to $575 million to $580 million, up from $565 million to $575 million.

Anyway you look at it, that's a whole lot of green from prepaid debit cards.

What's driving this growth in the prepaid debit card business? I suspect one reason is the prominence of online commerce, and the need to shop with some type of credit card-like account. I also think people from every income bracket are fed up with hefty bank overdraft fees, high-interest credit cards, and the risk of identity theft and threat of thieves gaining access to primary bank and credit card accounts when shopping online.

These conditions are helping Green Dot grow organically, but then there's the growth from its recently approved partnership. This week, the company announced that its banking division had been granted approval by the Board of Governors of the Federal Reserve System and the Utah Department of Financial Institutions to acquire Wal-Mart's (NYSE: WMT) MoneyCard Portfolio from GE Capital Retail Bank. The transaction is expected to be completed in Q1 2014.

Basically, this agreement will allow GE Bank to transfer all the deposits underlying the prepaid card, at face value, to GDOT. The company will then assume some of the liabilities associated with the cards, but it also will gain the revenue from the deal.

Wall Street loved this news, and in Monday trade, GDOT shares surged just over 5%. The company, and the stock, also got some love from Jefferies, as analysts at the firm upgraded GDOT to a "buy" from a "hold." They also increased their price target to $29 from $26.

At current levels, a spike to $29 would be a gain of about 19%. And while this is a 52-week price target set by Jefferies, I suspect that GDOT shares will get there much sooner. In fact, I think GDOT will see very strong fiscal metrics over the holiday shopping season when the company reports earnings on Jan. 27.

Recommended Trade Setup:

-- Buy GDOT at the market price-- Set stop-loss at $22.37, approximately 8% below the current price-- Set initial price target at $29 for a potential 19% gain in two months